Slate Money – The Pisco Sour Edition

Date: June 11, 2016
Host: Felix Salmon
Guests: Jordan Weissman, Cathy O'Neil

Episode Overview

This week’s Slate Money, cheekily dubbed the "Pisco Sour Edition," brings together Felix Salmon, Jordan Weissman, and Cathy O’Neil for a freewheeling discussion on business and finance. The big stories: the story of French rogue trader Jérôme Kerviel's legal and public battles, a deep dive into vulture funds and a hedge fund vs. Peru legal saga, and a debate on Scotland’s novel approach to alcohol regulation. Along the way, the hosts riff on labor tribunals, financial journalism, and more, delivering colorful commentary and financial insights.

Key Discussion Points & Insights

1. Jérôme Kerviel: The "Hot Felon" of French Finance

Segment: [01:44] – [11:28]

• Background: Cathy recounts the story of Jérôme Kerviel, the French former Société Générale trader who lost €4.9 billion in 2008 through unauthorized trades—one of history’s biggest trading losses.
• Media and Public Image: The panel muses on how Kerviel’s good looks factor into public sympathy.
  • Cathy: “You look at pictures of him on the Wall Street Journal and it really looks like an ad for like watches or something...this guy’s really attractive, and we’re going to come back to that, because I’m wondering if that’s part of it.” [02:06]
• Financial Journalism Rare Moment: Unlike most financial reporting, the Kerviel scandal offered true causality—a direct event caused a specific market move.
  • Cathy: “This is one of the very, very few times when you can say, this futurist stock index was down because they were unwinding a massive trade in SocGen...the only time ever you can actually write an article like that.” [11:13]
• Court Ruling: Against all odds, a French labor tribunal awarded Kerviel €450,000 for wrongful termination, despite his colossal trading loss.
  • Felix: “Losing $6 billion is clearly not good enough reason to get fired if you work in France.” [05:27]
  • Jordan: “On the one hand, it is obviously funny that they said you did not have cause to fire this guy who was theoretically a rogue trader and lost you €4.95 billion. On the other hand…a lot of people feel he was unfairly scapegoated for this kind of bigger corrupt system.” [06:18]
• Debate: The hosts discuss whether Kerviel was a scapegoat or a lone fraudster, and whether financial institutions turn a blind eye to profitable “rogue” behavior.

2. Vulture Funds vs. Peru: The Gramercy Land Bonds Saga

Segment: [11:28] – [23:21]

• Background: Explores the Gramercy hedge fund’s battle to claim $1.6 billion from Peru on ancient "Peruvian land bonds" issued after a 1960s land reform.
  • Felix: “There’s almost nothing more obscure than the Peruvian land bond.” [12:25]
• History: The land bonds were compensation to landowners whose land was expropriated by Peru’s military junta. Decades later, Gramercy bought up these “worthless” bonds from individual Peruvians.
• Strategy: Gramercy waited patiently, knowing statutory interest in a low-rate environment would make the claim even more valuable:
  • Felix: “A great thing about zero interest rate environment is that defaulted debt can look extremely attractive...they would actually rather that Argentina stayed in default for another year just so they could claim that extra.” [15:23]
• Leverage Shift: When the Peruvian president’s office allegedly committed fraud to influence a court opinion, Gramercy shifted tactics—claiming violation of a US-Peru bilateral investment treaty. Now, the dispute could be judged by an international tribunal, potentially forcing Peru to pay.
  • Felix: “They’re suing over this action which the Peruvian government took, which effectively expropriated the bonds...now they have a foreign court…which can theoretically rule on this.” [18:22]
• Political Context: Peru’s new president, Pedro Pablo Kuczynski, is a sophisticated banker likely to engage in pragmatic negotiation.
• Panel Opinions:
  • Jordan: “I don’t quite share Felix’s enthusiasm for [vulture funds], but…they are kind of a buyer of last resort for debt. And you kind of need that in the markets, if you have traded securities. But these are not traded securities.” [21:43]
  • Cathy: “It's basically they turn broken promises of debt into money.” [22:15]
• Economic Consequences: None of the proceeds benefit the Peruvian economy—just hedge fund investors.

3. Scotland’s Minimum Alcohol Pricing: A Pigovian Experiment

Segment: [24:22] – [34:01]

• Background: Scotland passed a law setting a minimum price per unit of alcohol to curb excessive drinking, rather than using a traditional alcohol tax.
  • Jordan: “Typically when a government wants to try and discourage people from some really unhealthy behavior, a really simple thing to do is just tax it...But Scotland is trying to do something a little bit different with alcohol right now.” [24:22]
• Why Minimum Pricing? A tax would hit all price points (including expensive whisky) and wouldn't necessarily target problematic drinking. The new policy specifically increases the floor price for cheap, high-alcohol products—e.g., cheap cider and beer—without affecting pricier liquors.
• Legal Fight: The Scotch Whisky Association challenged the policy in court; European Court of Justice ruled it must be proven more effective than regular taxes for public health.
• Comparisons: The hosts note similar public health-inspired taxes in Philadelphia (on both sugary and diet sodas) and explore parallels with American alcohol regulation after Prohibition, and with theoretical heroin regulation.
  • Cathy: “After Prohibition was ended...they did sort of define alcohol content for categories like beer and wine...You could call it a success story of legalizing this previously illegal substance. And I want to compare that, if you don’t mind, to the heroin addiction, the heroin epidemic...” [31:13]
• Panel Verdicts: Overall, the hosts agree the minimum pricing experiment is worth trying, citing evidence from Canada and cautioning that real-world effects will be closely studied.

4. Numbers Round

Segment: [34:01] – [39:24]

• Cathy's Number: 60,000—amount in dollars a NYC prison guard boss received as a kickback, delivered in a Ferragamo bag, for steering union money to a hedge fund. [34:12]
  • Cathy: “He’s, like, really into Ferragamo as a brand.” [34:46]
  • Felix: “It is a shitty hedge fund. It’s a very shitty hedge fund. But at least it got good returns.” [35:35]
• Felix's Number: 65 billion pounds—the amount that left UK sterling assets in March in anticipation of the "Brexit" referendum, signaling serious financial jitters. [36:40]
• Jordan's Number: 1400—the kilometers Jérôme Kerviel walked on his “reverse pilgrimage” from Rome to France, as part of his self-reinvention after the scandal. [38:23]
  • Jordan: “He met the Pope...then decided to do a reverse pilgrimage from Rome to the French border...the Johnny Appleseed of former rogue traders.” [38:41]

Notable Quotes

• On Kerviel's legal win:
  • Felix: “Losing $6 billion is clearly not good enough reason to get fired if you work in France.” [05:27]
• On vulture funds and debt:
  • Cathy: “It’s basically they turn broken promises of debt into money.” [22:15]
• Financial journalism pet peeve:
  • Cathy: “So often you see a financial journalism article starting with ‘stock market is up on news of such and such’...and it’s just a sort of empty article that means nothing. And this is one of the very, very few times when you can say, this futurist stock index was down because they were unwinding a massive trade in SocGen.” [10:41]
• On Scotland’s alcohol policy:
  • Jordan: “They’re specifically saying we’re going after cheap booze that poor people drink and we’re not getting the money.” [29:48]
  • Felix: “There is substantial empirical evidence that if you raise the price of alcohol, then people will drink less.” [30:43]
• On legalizing and regulating heroin:
  • Cathy: “If we like legalized and regulated heroin, I know it’s radical, but this kind of law about how strong heroin is allowed to be would actually be very powerful.” [32:30]
• On public policy experiments:
  • Jordan: “…It’s interesting to see a whole…country do this and just compare their results…” [33:15]

Memorable Moments & Humor

• The Ferragamo bag bribe: The incongruity of a blue-collar union boss receiving cash in a luxury handbag as a kickback. [34:12 – 34:53]
• The “Gentle Junta” band name: Spontaneous band name creation.
  • Jordan: “That’s my band name, by the way, Gentle Junta.” [13:49]
• Pisco Sour digression: A quick detour about the origins and national pride around the Pisco Sour cocktail. [23:22]

Timestamps for Major Segments

• Jérôme Kerviel Rogue Trader Story: [01:44] – [11:28]
• Vulture Funds vs. Peru: [11:28] – [23:21]
• Scotland’s Minimum Alcohol Pricing: [24:22] – [34:01]
• Numbers Round: [34:01] – [39:24]

Tone & Style

Slate Money’s hosts balance sharp, sometimes irreverent humor with astute financial analysis. Their conversational style allows for both rigorous, technical explanation and playful banter (“Gentle Junta,” “how hot he is”). Even complex subjects—sovereign debt litigation, labor laws, fiscal policy—are rendered accessible and relatable.

This episode offers a dynamic, entertaining, and insightful look at finance headlines, with lots of context, skepticism, and the occasional sideways glance at the absurd. Whether you’re interested in global finance or just want to know what a Pisco Sour is, this edition covers plenty of ground.